Fed Pushes interest rate rise to 2014

Timetable could change if recovery, inflation heat up

The Federal Reserve went further than ever Wednesday to assure consumers and businesses that they’ll be able to borrow cheaply well into the future.

The Fed pushed back the date for any likely increase in its benchmark interest rate by at least a year and a half, until late 2014 at the earliest.

Its new timetable showed the Fed is concerned that the economy’s recovery remains stubbornly slow. But it also thinks inflation will stay tame enough for rates to remain at record lows without igniting price increases.

Chairman Ben Bernanke cautioned that the Fed’s late-2014 horizon for any rate increase is merely its “best guess.” It has the flexibility to shift its timetable if the economic picture changes. But speaking at a news conference later, Bernanke said: “Unless there is a substantial strengthening of the economy in the near term, it’s a pretty good guess we will be keeping rates low for some time.”

The Fed’s tepid outlook also suggests it’s prepared to do more to help the economy. One possibility is a third bond-buying program. The idea would be to further drive down rates on mortgages and other loans to embolden consumers and businesses to borrow and spend more.

In a statement Wednesday after a two-day policy meeting, the Fed held out the possibility of taking such action later. It said it’s ready to adjust its “holdings as appropriate to promote a stronger economic recovery in the context of price stability.”

Treasury yields fell after the Fed made its announcement, but they stopped declining after the Fed later issued forecasts for the economy and interest rates. They showed that while some members foresee super-low rates beyond 2014, six of the 17 members forecast a rate increase as early as this year or next.

It was the first time the Fed had released interest-rate forecasts from its committee members. It will now do so four times a year, when it also updates its economic outlook.

The rate forecasts are an effort to provide more explicit clues about the Fed’s plans. They also coincide with a broader Fed effort to make its communications with the public more open and give itself some additional ammunition to boost the still-weak economy.

Lower yields on bonds tend to encourage investors to shift money into stocks, which can boost wealth and spur more spending.

Stocks, which had traded lower before the Fed’s announcement, quickly recovered their losses. The Dow Jones industrial average, down about 60 points before the announcement, closed up 81 points.

Though Bernanke stressed the Fed’s ability to adjust rates as its outlook shifts, some analysts expressed concern. Dana Saporta, an economist at Credit Suisse, said the now-much-longer timetable for a likely rate increase could compromise the Fed’s credibility if it must raise rates before late 2014. Unexpectedly strong growth and inflation could force such an increase.

“It’s striking that the Fed would make an implicit commitment for almost three years,” Saporta said. “It seems like an awfully long time to make such a statement. Given that no one knows what will happen … the (Fed) may eventually regret this.”

The Fed slightly reduced its outlook for economic growth this year to 2.7, down from its November forecast of up to 2.9 percent.

But it sees unemployment falling as low as 8.2 percent this year, better than its earlier forecast of 8.5 percent. December’s unemployment rate was 8.5 percent.

For the first time, the Fed provided an official target for inflation — 2 percent — in a statement of its long-term policy goals. It didn’t set a target for unemployment. But it said unemployment between of 5.2 percent and 6 percent would be consistent with a healthy economy.

Bernanke noted that the Fed expects the economy’s growth to remain only moderate over the next year. He pointed to the persistently depressed housing market and continued tight credit for many consumers and companies.

The Fed described inflation as “subdued.” That was a more encouraging description than it offered last month.

The Fed has taken previous steps to strengthen the economy, including purchases of $2 trillion in government bonds and mortgage-backed securities to try to cut long-term rates and ease borrowing costs.

The Fed said Wednesday that it would keep its holdings of Treasury securities and mortgage-backed bonds at record levels and continue a program to further drive long-term rates lower by selling shorter-term securities and buying longer-term bonds.